Warren Buffett-backed USG to open sale talks with Germany's Knauf

USG had in March rejected a $5.9 billion takeover proposal by Knauf, its second-largest shareholder, that valued the wallboard maker at $42 per share.

Merger talks may not succeed. USG signaled it might hold out for more than $42 per share and that Knauf "will see value in excess" of its original bid.

Warren Buffett

David A. Grogan | CNBC

U.S. building products company USG Corp on Tuesday said it agreed to open talks to sell itself to Germany's Gebr Knauf AG, a sale that could benefit Warren Buffett's Berkshire Hathaway Inc, USG's largest shareholder.

Shares of USG rose to their highest since August 2007.

USG had in March rejected a $5.9 billion takeover proposal by Knauf, its second-largest shareholder, that valued the wallboard maker at $42 per share.

But USG changed its mind after Berkshire, which holds a roughly 31 percent stake, and two major proxy advisory firms recommended voting against four USG board nominees at the Chicago-based company's May 9 annual meeting.

Merger talks may not succeed. USG signaled it might hold out for more than $42 per share and that Knauf "will see value in excess" of its original bid.

"Given USG's having publicly endorsed in a recent investor presentation that it views its intrinsic value at $45 to $52 per share, I don't think they're that far apart from getting a deal over the finish line," said Garik Shmois, a senior analyst at Longbow Research, who rates USG "neutral."

Knauf, which recently held a 10.5 percent USG stake, said it was encouraged by USG's change of heart, although its original all-cash offer still reflected "full and fair" value.

"We are pleased that the board has acknowledged shareholders want to see a transaction," Knauf said.

Berkshire did not immediately respond to a request for comment.

In afternoon trading, USG shares were up $1.72, or 4.3 percent, at $41.95 on the New York Stock Exchange.

Berkshire has owned a USG stake since 2000, held on as asbestos liabilities helped push USG into a five-year bankruptcy, and provided a $300 million lifeline in 2008 after the housing market imploded.

At Berkshire's 2017 annual shareholder meeting, Buffett called USG "not one of my great ideas" but "no disaster."

Berkshire had in March offered to sell its 43.4 million USG shares for at least $42 each, if Knauf bought the rest of USG for that price or more. Knauf would have paid Berkshire $2 per share up front for that privilege.

"It shows that Berkshire has been frustrated with its investment in USG" and that Knauf's bid was "close enough," Shmois said.

A sale would add to Berkshire's roughly $116 billion of cash and equivalents, giving Buffett more ammunition for one or more of the "huge" non-insurance acquisitions he has said he wants.